The USD/JPY exchange rate begins the week on a weak note, influenced by several factors. The Japanese Yen (JPY) gains strength due to expectations of a Bank of Japan (BoJ) rate hike and a global risk-averse mood. Meanwhile, the US Dollar (USD) weakens due to a US credit rating downgrade and a more cautious outlook from the Federal Reserve. During the Asian session, the pair fell to about 144.80, marking a one-week low. The market seems to be trending downwards after reaching a nearly six-week high last Monday, with the JPY supported by possible interest rate hikes from the BoJ.

US Credit Rating Downgrade

Moody’s recently downgraded the US credit rating from “Aaa” to “Aa1” due to rising national debt. This shift has led investors to seek safer assets like the JPY. The USD is under pressure as the Federal Reserve may lower interest rates due to slowing inflation and concerns about a potential economic slowdown in the US. No major US economic data is expected on Monday. Therefore, USD movements may depend on communications from the Federal Reserve and general market sentiment. The difference in policies between the BoJ and the Fed suggests a challenging outlook ahead. However, if the USD/JPY pair rises in the short term, it might present selling opportunities. In simple terms, the Japanese yen has gained appeal lately not because of sudden strength in Japan’s economy, but mainly due to issues in the US. With Moody’s downgrade of the US credit rating, investors quickly shifted to safer assets like the yen, which typically performs well during uncertain times. At the same time, the Federal Reserve is signaling that it may pause or even lower interest rates. With US inflation slowing and concerns about the economy growing—especially as the labor market shows signs of cooling—lower interest rates could lead to a weaker dollar since returns on dollar-based assets may become less attractive.

Policy Divergence

On the other hand, the Bank of Japan is starting to adjust its long-standing very loose policies. While changes have been slow in Japan, expectations for at least a small rate hike are rising. This contrast—Japan possibly tightening while the US loosens—points to ongoing pressure on the USD/JPY pair. The drop below 145 was more significant than just breaking a round number. It clearly rejected last week’s peak, and unless there are unexpected developments from Washington or Tokyo, any rallies might offer chances to re-enter the downtrend. Earlier highs, especially those above 147, held steady. With the market’s bias changing, a retest of 144 or lower seems likely. It’s also worth noting that with no major US data releases at the start of the week, the pair is more sensitive to broader market sentiment and comments from Fed officials. Markets are now extremely responsive to tone. Statements that come off as softer or less firm on tightening can negatively affect the dollar. For short-term trading, this indicates a tendency to favor a stronger yen or at least view any dollar recovery as short-lived. This is especially true if reactions to Fed communications remain muted or dovish. Implied volatility is relatively low, but as speculation about the BoJ increases, the likelihood of significant moves—especially around rate-sensitive news—grows. Globally, risk appetite continues to decline, providing support for the yen, which traditionally performs well in stressful situations. Movements in US and Asian equity indexes should be monitored closely. If the sentiment remains cautious, JPY inflows could increase. Overall, the mood seems to favor further dollar weakness against the yen as market positioning evolves. The gap between the two monetary policies is becoming clearer, and short-term traders should focus on key levels such as 144 and 143.60, paying attention to price movements at those levels before making adjustments. Create your live VT Markets account and start trading now.

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